UK government borrowing surged to £17.4 billion in October, the second-highest figure for the month since records began in 1993. Key drivers included public sector pay increases, record-high debt interest payments, and increased spending following Chancellor Rachel Reeves’ first Budget. Analysts warn that these figures underscore the challenges of balancing public finances, especially as inflation and slow economic growth add pressure.

1. October Borrowing at Record Levels

Government borrowing—the gap between spending and revenue—hit £17.4 billion in October 2024. This was £1.1 billion higher than the same period last year, driven by:

• Public Sector Pay: Pay for NHS staff and teachers increased by £2.2 billion compared to the previous year, following above-inflation, backdated deals announced by Labour.
• Debt Interest Payments: Payments on government debt reached £9.1 billion, the highest ever for October, reflecting rising interest rates.

2. Challenges for Public Finances

The borrowing figures reflect the complexities facing the new government:

• Economic Struggles: Recent data revealed sluggish GDP growth between July and September and higher-than-expected inflation.
• Rising Debt Levels: The UK’s net debt stands at £2.8 trillion, or 97.5% of GDP—levels not seen since the 1960s.
• Increased Spending: The Budget is set to boost annual government expenditure by nearly £70 billion over five years, half funded by tax increases and the rest through borrowing.

3. Government’s Fiscal Strategy

The Labour government, under Chancellor Reeves, has revised fiscal rules to track public sector net financial liabilities (PSNFL), aiming to reduce debt as a share of GDP by 2029-30. Chief Secretary to the Treasury Darren Jones stated that Labour inherited a challenging economy and is focused on stabilising finances while prioritising investment to drive growth.

4. Analysts Highlight Limited Fiscal Flexibility

Economists are concerned about the lack of room for manoeuvre in future budgets:

• Potential Tax Increases: Alex Kerr of Capital Economics noted that Reeves may need to introduce further tax hikes to sustain spending plans.
• Fiscal Constraints: The current fiscal framework allows limited scope for increased day-to-day expenditures without further borrowing.

5. Mixed Public Reaction

The Budget has sparked criticism from businesses and farmers, particularly regarding tax hikes. Meanwhile, the delay in addressing inflation and ongoing questions about Reeves’ credentials have added to public and political scrutiny.

Conclusion: Balancing Growth and Stability

The October borrowing figures highlight the tightrope the UK government must walk to stabilise public finances while delivering on spending promises. With debt at historic levels and economic growth sluggish, the government faces mounting pressure to strike a balance between fiscal responsibility and investment-driven growth. As borrowing continues to climb, tough decisions may lie ahead for the Chancellor and her team.

Source: (BBC.co.uk)